It might surprise you, but 41% of the 3.167 million residential investment properties across Australia are either cash flow neutral or produce a profit for their owner, according to the latest statistics from the Australian Taxation Office (ATO). The figures show that the average annual cash profit is $6,937.
The remaining 59% of property owners have an average annual shortfall of $6,582. If property market conditions, or personal circumstances, unexpectedly change for the worse, an asset which doesn’t require the owner to stump up $6,000 or more of their own income each year can become a blessing in disguise.
The good news is that the three RBA cash rate cuts within the space of five months means interest expense – typically the single biggest line item in a property investor’s profit-and-loss statement – is now at a historically low level.
Even with a deposit as small as 10%, there are currently quite a few locations across Australia where the average rental income can cover the vast majority of annual costs to own a quality property asset.
In some locations, the average house can generate surplus income for the owner. Consider the low maintenance, three-bedroom house which I purchased in Launceston, as proof of what’s possible. Located close to the CBD, I purchased the property for $375,000 in February 2018. The valuation of that property as at September 2019 was $450,000 so it has achieved 20% capital growth in 19 months.
The pre-tax annual cash flow of this property, if it was purchased with a 10% or 20% cash deposit, is $1,700 and $3,100 respectively. This calculation is based on median rents in the area, interest expenses on a 10% or 20% deposit, and a provision for typical costs such as repairs, maintenance, rates and charges as well as assuming the property is vacant for four weeks each year.
Cash flow positive suburbs
There are gold gems like this to be found all over Australia. Some experts say that if you choose a property based on positive cash flow that you risk missing out on capital growth but that’s not necessarily the case. Most locations – both in capital cities and regional locations – have potential for capital growth if you purchase a property at the right time.
In the table below, I’ve focused on capital cities to find examples of locations that can generate a positive pre-tax cash flow.
|Capital city cash flow positive suburbs|
|Suburb||Median house price||Annual profit for a standard house|
|July 2019||80% LVR||90% LVR|
|Salisbury Park||$281,500||$ 4,658||$ 3,603|
|Craigburn Farm||$696,500||$ 5,714||$ 3,102|
|Woodville North||$405,000||$ 3,918||$ 2,399|
|Ridleyton||$485,000||$ 3,875||$ 1,456|
|Osborne||$386,500||$ 3,155||$ 1,706|
|Blackstone||$277,500||$ 4,888||$ 3,848|
|Redbank||$320,000||$ 4,711||$ 3,511|
|Springfield Lakes||$422,000||$ 3,847||$ 2,265|
|Bray Park||$440,000||$ 3,307||$ 1,657|
|Bracken Ridge||$495,000||$ 2,975||$ 1,119|
|Charnwood||$455,500||$ 5,917||$ 4,208|
|Wright||$875,000||$ 7,166||$ 3,885|
|Gilmore||$565,000||$ 5,706||$ 3,587|
|Flynn||$580,000||$ 5,585||$ 3,410|
|Holt||$510,000||$ 5,160||$ 3,248|
|Muirhead||$513,750||$ 11,636||$ 9,709|
|Jingili||$482,500||$ 7,961||$ 6,152|
|Farrar||$490,000||$ 7,956||$ 6,119|
|Lyons||$665,000||$ 8,416||$ 5,922|
|Durack||$450,000||$ 6,521||$ 4,833|
|Chigwell||$320,000||$ 6,907||$ 5,707|
|Brighton||$350,000||$ 5,568||$ 4,256|
|Glenorchy||$380,000||$ 5,327||$ 3,902|
|Midway Point||$410,000||$ 4,537||$ 2,999|
|Howrah||$533,500||$ 2,698||$ 698|
|St Kilda||$900,000||$ 3,013||($ 362)|
|Tyabb||$550,000||$ 1,764||($ 299)|
|Bunyip||$516,000||$ 1,027||($ 908)|
|Coolaroo||$460,000||$ 511||($ 1,214)|
|Frankston North||$425,700||$ 169||($ 1,435)|
|Stratton||$279,000||$ 5,063||$ 4,017|
|Mirrabooka||$322,000||$ 3,334||$ 2,126|
|Tapping||$467,500||$ 3,800||$ 2,047|
|Yangebup||$415,000||$ 2,959||$ 1,403|
|Port Kennedy||$340,000||$ 3,672||$ 2,397|
|Caddens||$685,000||$ 4,522||$ 1,953|
|Bonnet Bay||$1,040,000||$ 3,973||$ 73|
|Bardia||$625,750||$ 3,444||$ 1,098|
|Lansvale||$665,000||$ 2,706||$ 212|
|Emerton||$445,000||$ 961||( $ 708)|
|Source: Propertyology. Calculations are based on median house values and median rents as at July 2019. The annual holding costs includes loan interest (assumes 3.75% interest rate), property management fees, insurance, council rates, general maintenance ($500 provision) and a provision of four weeks vacancy per year. Brackets indicate a loss.|
In Bracken Ridge, about 21 kilometres north of Brisbane’s CBD, a similar property at a similar price might put $1,119 in the owner’s pocket. If an investor purchased a property today in the Darwin suburb of Muirhead (median house price $513,750) with a 10% cash deposit, the property could potentially generate a pre-tax annual profit of $9,700.
The north Adelaide suburb of Ridleyton (median $485,000) is only 7 kilometres from the city heart and has a median weekly rent of $440. A typical Ridleyton house could generate an annual profit of $3,875 (20% deposit) or $1,456 (10% deposit).
The middle-ring Hobart suburb of Glenorchy has an affordable median house price of $380,000. For a small capital outlay, a standard house could potentially produce an annual profit of $3,900. And, with the lowest vacancy rates of any Australian capital city, investors have good prospects for rental income increases.
If that same 10% deposit ($38,000) was invested in a term deposit at an interest rate of 1.6%, the return is only $608 per year – well below the potential $3,900 cash profit from a Glenorchy house. And another advantage property has over term deposits is that it can produce capital growth although investing in property does carry greater risk. Over the past five years, Glenorchy’s 45% increase in median house price was one of the highest capital growth rates in Australia.
About 34 kilometres west of Sydney’s CBD, Lansvale’s median house price is $665,000 and, courtesy of recent interest rate cuts, it’s conceivably possibly to own a cash flow positive house with only a 10% deposit.
Some of Melbourne’s better cash flow suburbs are Frankston North (median house price $425,700), Coolaroo (30 kilometres north of the CBD), Bunyip (1-hour east) and Tyabb (1-hour south).
A $4,000 annual profit might be tempting in Perth’s Swan districts where the median house price is only $279,000.
While detached houses in Canberra are quite pricey, the returns are, on the whole, above-average. The outer north-west suburb of Charnwood ($4,200 profit from a 10% deposit) offers one of the strongest potential cash flows for detached houses.
About Simon Pressley
Simon Pressley is Head of Research at Propertyology, a buyer’s agency and property market research firm.
Main image source: Andrey_Popov (Shutterstock)